Where’s the Variation in Dairy Breakeven Costs?

An examination of 2015 cash flows for 107 Pennsylvania farms showed that breakeven cost ranged from less than $16/cwt to over $22/cwt.
Where’s the Variation in Dairy Breakeven Costs? - Articles
Where’s the Variation in Dairy Breakeven Costs?

During 2015 the Dairy Business Management team worked with 107 farms to study their break-even cost of production and look at ways to improve this number. We've worked on this effort for over five years, and from year to year the most predictable aspect seems to be the wide range of break-even cost between farms. We've summarized the data to attempt to explain what causes these differences. Table 1 outlines the 2015 data, showing cash flow on a per cow basis for herds with different break-even costs and the average across all farms.

Table 1. 2015 Dairy Enterprise Break-even Summary (107 farms).
Break-even, $/cwtAverage
<$16$16-$18$18-$19$19-$20$20-$22>$22
1Sum of dairy expenses, overhead expenses, owner draw, and loan payments.
Percent of Farms5%21%19%13%30%12%
Dairy Enterprise ($/Cow/Year)
Total Inflow$4,859$4,636$4,824$4,717$4,845$4,068$4,688
Total Feed Expenses
$1,992$2,145$2,353$2,375$2,596$2,338$2,364
Dairy Expenses$717$758$709$888$807$850$789
Overhead Expenses$700$620$818$848$920$1,042$831
Owner Draw$272$248$327$317$358$344$317
Loan Payments$278$518$432$432$510$558$479
Expenses Other than Feed1$1,966$2,144$2,286$2,485$2,595$2,794$2,416
Total Inflow - Total Outflow$892$339$177$(144)$(346)$(1,068)$(96)

Examining the inflow side of the cash flow equation, there is very slight variation among farms with different break-even costs in milk inflow per cow per year. At $4,688 average inflow, this number varies no more than $100 across the break-even groups. The exception to this observation is the 12% of farms with a break-even cost over $22/cwt. These farms are experiencing serious milk production issues that prevent them from achieving the milk sales needed. Dividing by a smaller number of pounds sold produces a high break-even cost. Production and financial management are forever interlocked where dairy cash flows are concerned. Without serious remediation of the production issues on this group of farms, financial difficulties will continue. Indeed, any farm that is experiencing a high break-even cost due to low production needs a partnership of skilled financial planning and high quality production consulting to remedy the issues. Too often farms in financial difficulty focus only on the cost side of the equation. While cost control is critically important, it is no more important than having a productive dairy that achieves milk production goals.

The second most predictable variation in break-even cost each year is feed cost per cow. Each year our summary consistently shows approximately $600/cow/year variation in the cost of all purchased and home-raised feeds for all animals on the farm. The most competitive group averages around $1,900/cow/year while the highest cost group is usually around $2,500/cow/year. Much of this variation is influenced by how well the cropping program complements the cow numbers on the farm. The most competitive group grows all forages required for milking cows, dry cows, and heifers. They also feed home-raised corn grain and sometimes grow and feed their own soybeans as well. When examining crop costs on these dairy operations there is a cost advantage to raising grains and forages over purchasing them. This may change as corn and soybean prices continue to erode, but only farms with serious yield challenges due to production issues or extremely high crop input costs can purchase feeds for less than homegrown grains and forages. Because of the cost advantage for homegrown feeds, the farms who implement aggressive double-cropping programs have been able to capture large cost savings by converting purchased corn and grass hay to raised ingredients. The double-crop forages produced can replace grass hay for dry cows and heifers and open up acreage to grow corn grain that might have previously been used exclusively for perennial crops. A financially challenged farm that won't consider serious adjustments to their feed and cropping program will have a difficult time making significant financial progress. There are many different cropping programs that can work, and the farm must select the combination of crops best suited for their soils and climate. The key is to increase diversity in the cropping program and use both winter and summer annuals to increase total tonnage grown for the year.

There can be a small amount of variation in dairy expenses, owner draw, and loan payments across farms. Each of these items varies about $100 across each of the break-even groups. With dairy expenses the variation is often due to differences in the farm's use of custom heifer raising and custom manure hauling. Owner draw and loan payments vary with the family income requirements and the degree of investment on the farm, respectively. While the range is wide on loan payments per cow per year between farms, it doesn't explain the large differences in break-even cost. Sometimes people focus on too much debt as the reason for financial challenges. Based on the work conducted by the Extension Dairy Team, the underlying cause is often a costly feed and crop program along with low milk sales.

Overhead costs factor into the differences observed with break-even costs, with about $500/cow/year contributing to the variation. These include items like fuel, repairs, hired labor, insurance, real estate taxes, utilities, and building and machinery leases. Among these items, nearly all of this variation between farms can be accounted for by hired labor cost. Hired labor tends to increase in a linear fashion as cow numbers increase. An old farm management standard suggests one labor equivalent can manage 55 cows. While labor efficiency varies greatly across farm sizes, increasing herd size will raise hired labor costs. Overhead costs are frequently unique to an individual farm operation. The quality of the dairy facility, the amount of rented or owned land, real estate taxes, and even utility costs can be very unique to an individual farm. When considering a farm purchase, rental, or farm expansion, research these items carefully since these costs are frequently difficult if not impossible to change without considerable added investment to the farm. The other name for these costs--"the fixed costs" speaks to the difficulty of lowering these items for an established business. Your goal is to dilute these costs as much as possible by increasing milk sales without requiring additional overhead costs. That's the goal of both increased cow numbers and higher milk sales--dilute the overheads to reduce the break-even cost.

To appreciate the relative importance of the differences in break-even costs, consider the following: $100 (income variation) + $600 (feed costs) + $100 (dairy expenses) + $500 (overhead costs) + $100 (owner draw) + $100 (loan payments) = $1,500 per cow per year. While not a perfect assessment of differences, this summary accounts for $1,500 of the $1,800 per cow per year observed in the data.

To reduce a farm's break-even cost of production, begin with a thorough assessment of the feed and crop program. Use the combined expertise of your crop consultant, dairy nutritionist, and financial advisor to address this issue. At the same time consider any production bottlenecks that may be holding back either milk production or components. These may include forage quality or forage inventory issues that must be addressed before you can sell more milk at a more economical cost. Follow up that effort with ways to make the most efficient use of your farm labor resources. Look for ways to alter farm work routines or procedures to make the best use of labor hours. Working on these two big picture issues will go a long way toward a more competitive farm break-even. Is there a better risk management strategy against low milk prices than a low break-even cost?

Authors

Dairy Business Management Dairy Nutrition

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